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The ZOPA Part 1 - the ZOPA is getting better.

Posted on 17 Aug 2012 by Matt McGuire

As a lender at Zopa you will be pleased to know that over the next few weeks we will be improving the information available to you when deciding what interest rate to offer to borrowers. These changes will make it easier for you to estimate how long it will take to lend your money on the Zopa marketplace and better equip you to choose the interest rate that is right for you.

Lenders set the rate they offer to borrowers on the lending offer page and one of the key features of the page is the ZOPA. The ZOPA is defined as “the ‘Zone of Possible Agreement’ and is where all the action takes place in a market. It is defined by the range of interest rates that were included in all the approved loans in the market over the last seven days, which is a good benchmark for how competitive rates will be over the next seven days. So, if the rate you’ve selected is in the ZOPA, you should get a good balance between lending your money out quickly and earning optimum returns. If the rate you’ve selected is too low, you’ll get your money lent out at the maximum possible speed but you could have earned a higher return on it. And if the rate you’ve selected is too high, you’ll take a long time to lend your money out and start earning interest”

In other words the ZOPA is a forecast of how much money you will lend out in the next 7 days. Right now this is worked out by following a simple and logical procedure:

  1. Figure out where your lending offer is in the lending offer matching queue
  2. Calculate the smallest size of loan the lending offer can participate in given its position in the queue
  3. Work out the number of sufficiently large loans that were disbursed in the last 7 days and assume the same number will be disbursed in the next 7 days – this is the lending forecast

The method suffers a drawback - a lending offer’s position in the matching queue can change significantly through-out the day as other lending offers further up the queue are matched or funded and drop in and out of the queue. This often means that the top and bottom of the ZOPA changes significantly from one hour to the next. Since the ZOPA is intended to provide a 7 day forecast this can be confusing and doesn’t serve the intended purpose.

Work is in progress to provide a more accurate lending forecast and a more stable ZOPA to give our lenders the best and most consistent experience possible. I’ll be posting some details of the new method here in the next day or two.

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